Retirees may be better off financially than many think.
A recent Center for Retirement Research analysis shows how most retirement income from 401(k) plans and Individual Retirement Accounts is not captured in the Census Bureau’s widely used Current Population Survey — leading to drastic understatements in retirement income, and particularly so among the wealthy.
In “Do Census Data Understate Retirement Income?”, authors Alicia H. Munnell and Anqi Chen compare the Census data with the Federal Reserve’s 2013 Survey of Consumer Finances (a nationally representative survey of about 6,100 households that’s considered the “gold standard for data on household wealth”) and the income reported to the Internal Revenue Service.
What they found: the Census’ Current Population Survey reports $18 billion of 401(k)/IRA income in 2012, while the Fed’s Survey of Consumer Finances reports $220 billion and the IRS $229 billion.
Although the CPS appears to under-report income from retirement plans in general, Munnell and Chen focus on the defined contribution problem because, as they found, under-reporting for defined contribution plans is much larger than that for defined benefit plans.
This poses a serious problem given the shift from defined benefit to defined contribution plans, and the fact that defined contribution plans are likely to eventually be the only source of income from retirement plans for private sector workers.
It should be noted, though, that the Census’ data for low-and middle income households’ retirement income is not actually too far off.
“While the [Current Population Survey] involves significant under-reporting of income from 401(k)s/IRAs, which needs to be fixed, the survey still provides a relatively accurate picture of retirement income for the typical middle-income household, who holds little wealth from retirement plans,” write Munnell and Chen.